Will Amazon Shares Ever Make Money?

Shares of Amazon.com (Nasdaq: AMZN) have been a favorite for growth investors.

In a world of sluggish retail sales, e-commerce has been a rare bright spot. For consumers, the lower prices and convenience of ordering online is appealing.

Amazon has been one of the biggest benefactors. Between 2010 and 2012, the company’s revenues have surged 78%. Sales are expected to grow another 22% this year.

Such rapid growth has attracted investors to the stock. Amazon’s share price has nearly doubled in the last three years, and its market capitalization now stands at nearly $150 billion.

The Seattle retailer has grown considerably from its humble beginnings as an online book vendor when it was founded in 1994. In its recent cover story on founder Jeff Bezos, Business Week accurately describes how “Amazon became the everything store.”

I love the company and have been an Amazon Prime customer since 2007. But I’ve never bought the stock. And for one simple reason. . .

Amazon isn’t profitable. With few exceptions, the company has basically operated at break-even or turned a tiny profit.

Investors have turned a blind eye to the company’s lack of profitability, instead choosing to embrace the company’s expansion into new product categories such as its high-end artwork, its development of the Kindle e-reader, and its cloud-computing service, Amazon Web Services.

Amazon bulls argue that the company is investing in its future by aggressively growing the business. And so it’s reinvesting all of its cash in growth. But that begs the question: when will Amazon start making some real money?

Where Are the Profits @ Amazon?

2010

2011

2012

2013 (est.)

Revenues

$34.2

$48.1

$61.0

$74.4

Net Income

$1.2

$0.6

$0.4

$0.4

EPS

$2.53

$1.37

$0.09

$0.87

*Revenues and net income expressed in billions

Last quarter, Amazon reported a net loss of $7 million, or $0.05 per share. Those losses aren’t staggering. But they do show that Amazon is unprofitable.

This year, analysts estimate that Amazon shares will earn $0.86 per share. While that may sound decent, that’s a net profit of just $400 million – a profit margin of just 0.5%.

Even in the world of low-margin retail, that profit margin is tiny. Costco (NYSE: COST) and Wal-Mart (NYSE: WMT) are two of the biggest discount retailers in the U.S. Even with the cost of a huge physical presence, Costco operates with a 1.9% profit margin and Wal-Mart at 3.6%. Those are razor-thin profit margins, but are considerably healthier than Amazon’s.

With Amazon shares trading at $328 – just a few points below their all-time –investors are betting big on the company’s future profits.

Analysts also expect bigger profits from Amazon. Estimates call for EPS to more than triple next year. By 2016, they’re predicting EPS of $10.61. But that’s a full three years away, and who knows what will transpire between now and then.

There is no doubt that the stock is expensive. Shares are trading at a P/E multiple of 112-times next year’s earnings. Even when I take a long view of Amazon – and value it based upon 2016 EPS – shares trade at 30-times earnings.

Even that valuation is rich, when you consider that Amazon is growing its sales at 20% a year. Plus, the company hasn’t demonstrated any ability or desire to turn a profit.

Amazon’s sole focus is growing revenues and expanding its business. With no commitment from Bezos or management to turn a profit and return capital to shareholders, Amazon is a stock investors should avoid. Owning Amazon shares is simple speculation that someone else will pay more for the stock in the future.

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